Cash is king

The phrase "Cash is King" became widespread during the financial crisis in 1987, courtesy Pehr G Gyllenhammar, the then CEO of Volvo. The statement signifies the importance of having cash on hand or instantly accessible cash, also known as free cash flow (FCF).

During an economic downturn, FCF provides flexibility to a company to repay its creditors and pay dividends and interest to investors without hampering the day-to-day operations. Naturally, the bigger the FCF amount is, the more flexibility a company will have.

The world has been experiencing prolonged economic turmoil since the outbreak of the pandemic back in 2020. The situation aggravated further after the Russia-Ukraine war.

According to the International Monetary Fund, the global growth will be 3 percent in 2023 against 3.5 percent in 2022. It is going to be even more challenging in 2024 with 2.9 percent growth, much lower than the historical average of 3.8 percent in recent times.

Bangladesh is no exception and feeling the same heat. The World Bank predicts that Bangladesh's GDP growth will be 6 percent in 2023, which is 1.1 percentage points lower than in 2022.

Presently, Bangladesh's economy is confronted with higher inflation, energy shortages, a balance-of-payments deficit, and a revenue shortfall. The import of capital machinery, raw materials, and intermediate goods is being curbed due to the ongoing USD crunch. Consequently, our growth is going to be slow in 2024.

In the backdrop of such huge challenges, many of our businesses are passing through tough times. In such difficult times, our businesses should be mindful of managing healthy FCF as it improves liquidity, which is critical for addressing any unforeseen expenses, meeting obligations, and even seizing opportunities.

One might ask, what is the threshold of a healthy cash flow? There is no straightforward answer to this as it varies from industry to industry, company to company, and situation to situation. Experts suggest organisations generate more cash than their expenditures. They must have sufficient working capital to cover at least three to six months of operating expenses, including paying the debts.

To maintain healthy FCF, companies need to focus on certain areas and put in efforts consciously and constantly. It all starts with having a cash flow forecast that outlines the expected inflows and outflows in detail.

Managing costs in difficult periods has a profound impact on the overall operations of any business. Businesses must review all their expenses and identify areas where they can reduce costs without impacting the core operations.

Renegotiating with the suppliers and postponing non-essential expenditures help manage costs effectively. Managing inventory contributes to reducing stress on working capital while faster inventory turnover enables to generate cash quickly.

Companies must accelerate accounts receivable by constantly following up on overdue accounts, encouraging clients to pay faster. Offering early payment discounts might help reduce receivables.

Companies should also constantly look to explore new revenue streams by entering new markets and introducing new products to reduce dependency on certain sources of income. Cost-effective financing options like lines of credit, loans or grants to inject cash need to be aimed at as well.

In the backdrop of an extremely challenging environment, businesses need to have proactive measures in place to ensure healthy cash flow. Yes, cash is going to be the king and saviour in turbulence.

The author is chairman and managing director of BASF Bangladesh Limited. Views are personal.